1. OPSM 301 Operations Management
Koç University
OPSM 301 Operations Management
Class 22:
Aggregate Planning (Chapter 13)
Zeynep Aksin

2. Announcements
Reminder: Midterm 2 next Tuesday on 20/12 at 17:00 CAS-Z08
Aggregate Planning: will skip AP in services; however OPSM 405 Service Operations Management has an extensive module on this topic
Linear Programming: Quantitative Module B; will skip graphical solution and sensitivity analysis parts

3. Example 2: Finding Cu and Co
A textile company in UK orders coats from China. They buy a coat from 250€ and sell for 325€. If they cannot sell a coat in winter, they sell it at a discount price of 225€. When the demand is more than what they have in stock, they have an option of having emergency delivery of coats from Ireland, at a price of 290.
The demand for winter has a normal distribution with mean 32,500 and std dev 6750.
How much should they order from China??

4. Daily workforce and customer
Operations Planning
Process Planning
Long
range
Strategic Capacity
Planning
Manufacturing
Aggregate Planning
Service
Master Production
Medium
range
Scheduling
Material Requirement
Planning
Order Scheduling
Weekly workforce and
Short
range
Customer scheduling
Daily workforce and customer
scheduling

5. Relationships of the Aggregate Plan
Plan for
Production
Demand
Forecasts,
orders
Master
Schedule, and MRP systems
Detailed Work
Schedules
External
Capacity
Subcontractors
Inventory On
Hand
Raw Materials
Available
Work Force
Marketplace
and Demand
Research and
Technology
Product
Decisions
Process
Planning & Capacity

6. Provides the quantity and timing of production for intermediate future
Aggregate Planning
Provides the quantity and timing of production for intermediate future
Usually 3 to 18 months into future
Combines (‘aggregates’) production
Often expressed in common units
Example: Hours, dollars, equivalents (e.g., FTE students)
Involves capacity and demand variables
Point out that aggregate scheduling involves disaggregation of, or adding detail to, the aggregate schedules.

7. Aggregate Planning Goals
Meet demand
Use capacity efficiently
Meet inventory policy
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.

8. Aggregate Planning Strategies Pure Strategies
Capacity Options — change capacity:
changing inventory levels (recall from earlier session that these are known as seasonal inventory)
varying work force size by hiring or layoffs
varying production capacity through overtime or idle time
subcontracting
using part-time workers

9. Aggregate Planning Strategies Pure Strategies
Demand Options — change demand:
influencing demand
backordering during high demand periods
counterseasonal product mixing

10. Aggregate Scheduling Options - Advantages and Disadvantages
Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service,
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Used where size
of labor pool is
large

11. Advantages/Disadvantages - Continued
Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Subcontracting
Permits
flexibility and
smoothing of the
firm's output
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings

12. Advantages/Disadvantages - Continued
Option
Advantage
Disadvantage
Some
Comments
Using part-time
Less costly and
High
Good for
workers
more flexible
turnover/training
unskilled jobs in
than full-time
costs; quality
areas with large
workers
suffers;
temporary labor
scheduling
pools
difficult
Influencing
Tries to use
Uncertainty in
Creates
demand
excess capacity.
demand. Hard to
marketing ideas.
Discounts draw
match demand to
Overbooking
new customers.
supply exactly.
used in some
businesses.

13. Advantage/Disadvantage - Continued
Option
Advantage
Disadvantage
Some
Comments
Back ordering
during high-
demand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backorder.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.

14. The Extremes Level Strategy Chase Strategy Production equals demand
Production rate is constant
It may be helpful to stress that the extremes depicted above are the opposite ends of a continuum.

15. Example 1: Total sales for the year = $130 million
May
Sept.
Nov.
Dec.
Jan
Feb
Mar
Apr
Jun.
July
Aug
Oct.
Monthly sales forecasts ($ million)

16. Cumulative sales forecasts
Cumulative Chart
120-
May
Sept.
Nov.
Dec.
Jan
Feb
Mar
Apr
Jun.
July
Aug
Oct.
Cumulative sales forecasts
($ million)

17. Chase Strategy 120- Cumulative sales forecasts ($ million)
May
Sept.
Nov.
Dec.
Jan
Feb
Mar
Apr
Jun.
July
Aug
Oct.
Cumulative sales forecasts
($ million)
Cumulative sales and
cumulative production

18. Level Strategy 120- Cumulative sales forecasts Cumulative sales
May
Sept.
Nov.
Dec.
Jan
Feb
Mar
Apr
Jun.
July
Aug
Oct.
Cumulative sales
Cumulative sales forecasts
($ million)
excess
Cumulative production
shortage

19. Labor Capacity Requirements
Chase Strategy Level Strategy
Sales in
labor-hours
(000)s
Variable work
force
Working
days
Variable work
week
Variable
inventory
January
February
March
April
May
…. … … … … ….
December
Total

20. Illustration of calculations
Level production
Total sales = $130 million
Total labor-hours required = $130 million/$30 = M labor-hrs.
Total hours = 243 days . 8 hrs/day = 1944 hrs
Number of workers = M / 1944 = 2229
Variable workforce for January
Sales in labor-hours = $7.6 M /$30 = 253,333
Working hours = 20 days . 8 hrs/day = 160 hours
Variable work force = 1581

21. Variable workweek for January
Sales in labor-hours = $7.6 M /$30 = 253,333
Number of workers = 2229 (average required, constant)
Variable monthly load for a worker = 253,333/2229 =
Variable workweek = /4 = 28.4 hours/week
Variable inventory for January (Level production)
Production in January =
(2229 workers)(20 days/month)(8 hrs/day) = 356,640
Demand for January = 253,333 (labor-hours)
Inventory = 103,307 labor-hours
Inventory ($) = (103,307)($30/labor-hour) = $309,920

22. Evaluating Alternatives
Hiring cost = $200 per employee
Firing cost = $500 per employee
Regular labor cost = $5 per hour
Overtime premium cost = $2.5 per hour
Undertime premium cost = $3 per hour
Inventory carrying cost = 2% per month (applied to the monthly ending inventory)
Beginning labor force = 1,583 persons
Beginning inventory = 0

23. Alternative 1: Variable Workforce
Zero-inventory, hire-fire as required
Starting Required Hire-fire Cost
Workforce Workforce
January 1, ,
February 1, , $16,800
March 1, , $36,200
April 1, , $5,400
May 1, , $72,000
June , , $454,500
…. … …… …… ……...
December 3, , $417,000
Total $2,708,300

24. Alternative 2: Level Production
constant worforce :2229, Variable Inventory
Initial hire = ( ) = Cost = 129,200
Initial Production Required Ending Cost
Inventory (labor-hours) Inventory
January , , , $
…. … …… …… ……...
Total $1,882,420

25. Example 2:
National Steel Corporation (NSC) produces a special-purpose steel used in the aircraft and aerospace industries. The Sales Department of NSC has received orders of 2400, 2200, 2700, and 2500 tons of steel for each of the next 4 months. NSC can meet these demands by producing the steel, by drawing from its inventory, or by using any combination of the two alternatives.

26. The production costs per ton of steel during each of the next 4 months are projected to be $7400, $7500, $7600, and $ Because costs are rising each month-due to inflationary pressures- NSC might be better off producing more steel than it needs in a given month and storing the excess.
Production capacity cannot exceed 4000 tons in any one month. The monthly production is finished at the end of the month, at which time the demand is met. Any remaining steel is then stored in inventory at a cost of $120 per ton for each month it remains there.

27. If the production level is increased from one month to the next, then the company incurs a cost of $50 per ton of increased production to cover the additional labor and/or overtime. Each ton of decreased production to cover the additional labor and/or overtime. Each ton of decreased production incurs a cost of $30 to cover the benefits of unused employees.
The production level during the previous month was 1800 tons, and the beginning inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500 tons to cover anticipated demand.
Formulate a production plan for NSC that minimizes the total costs over the next 4 months.

28. Data for the Production-Planning Problem of NSC
Month
Demand (tons)
Production cost ($/ton)
Inventory cost ($/ton/month)
Starting inventory = 1000 tons
Ending inventory (at the end of 4th month) = 1500 tons
Starting production level = 1800 tons
Cost of changing production level = $50 per ton (increase)
$30 per ton (decrease)